Politics of Despair

The New York Times has commissioned Adam Davidson to write a column for its Sunday magazine “to demystify complicated economic issues – like whether anyone (C.E.O.’s, politicians, people running for the presidency) can actually create jobs.”  Lest you not read the later columns, he tells you how they’ll come out: “The fact is that creating [jobs] in a far-too-sluggish economy is practically impossible in our current capitalist democracy.”

In one of his own columns and also in the New York Review of Books, the Washington Post’s veteran Washington analyst Ezra Klein has come to a similar conclusion about the Obama administration.  Given the opposition of the Republican party and the Democrats’ tenuous control of the Senate, Obama did pretty much all he could have done to stimulate job creation.  His stimulus package helped forestall another 1930s-type depression and lowered the unemployment rate by several percentage points, but now unemployment is stuck at nine percent and nothing further can be done.

The politics of despair has taken over.

Let’s not forget, however, that there is a way to create jobs in a sluggish economy:  government spending.  The New Deal did it in the 1930s.  During its iconic 100-day (reconvened) session in 1933, the 73^rd Congress financed two job programs (the Civilian Conservation Corps and the Public Works Administration) as well as relief for the poor and unemployed and the refinancing of residential mortgages to avoid foreclosure.  After Congress had adjourned, FDR created the Civil Works Administration (CWA) under which the government itself hired four million people for what turned out to be a very bitter winter.

CWA led in 1935 to the more permanent WPA (Works Progress Administration) that over the course of the next eight years spent 11 billion dollars employing 8½ million different people on well over a million projects that rebuilt the country’s infrastructure.  None of these programs cured the unemployment problem, but they did create jobs for workers that the private sector wasn’t hiring.  They put money in the empty pockets of previously unemployed people who promptly spent it, thereby stimulating the private sector to create more jobs to sell the products that the people who were temporarily employed by the government bought.

That as I understand it is what Keynesian stimulus is about.  During a recession reinforced by reduced spending on the part of insecure and out-of-work consumers, if the Federal Reserve has lowered short-term interest rates as much as it can, meaning close to or at the “lower bound” of zero percent, without inducing the private sector to produce enough output and create enough jobs to restore full employment, the economy is caught in a “liquidity trap.”  The surest way out is government spending not only to compensate for the inadequacy of private sector spending but also to stimulate the private sector to spend more.  During a liquidity trap, government can borrow at dirt-cheap rates and spend without driving up inflation or “crowding out” private sector spending.  It therefore makes economic sense for government to utilize idle workers to improve the economy’s infrastructure, as WPA did, while seeding the economy’s recovery to full output and employment.

Of course, FDR had advantages that Obama didn’t.  One was that the depression was much worse than our current recession and had lasted much longer when FDR took office.  As a result, he had overwhelming Democratic majorities in both chambers of Congress and a strong public mandate to do something – anything – to make things better.  Having served four years as Governor of New York that included the depression years and several years during World War I virtually running the Navy Department, he had experience and confidence that Obama lacked.  And while FDR was as fiscally conservative by nature as Obama seems to be, his concern for the needs of working people was greater than his conservatism.

FDR capitalized on these advantages and took swift and decisive action.  By the end of the 100 days, although economic conditions had actually gotten worse, “the feeling everywhere was so much better,” one of his close advisors wrote, and “good will [for FDR] spread like a benison over the land.”  Although FDR never got unemployment below ten percent until the huge stimulus of World War II, average Americans came to feel that FDR was trying to do something for them and stopped despairing.  The Democrats’ reward was long-lasting.  Voters kept them in control of the government for 18 of the next 20 years and in control of the House of Representatives for 58 of the next 62 years.

I suspect that the next opportunity for a Newer Deal, if it comes, will not occur before 2016.  By then the 99 percent will have suffered through eight years of despair and stagnant recovery and resistance to change by the one percent.  If they vote, they will control whether the country changes direction or stays the course.

Wall Street v. the Pentagon

The focus of the original 99 Percenters in the US who came together in response to a call to occupy Wall Street on September 17, 2011 was the metaphorical Wall Street – the big commercial and investment banks that pumped up the housing bubble to spawn risky home mortgages until the bubble burst and brought on the Great Recession with its enduring legacy of 9+ percent unemployment.

The government rescued Wall Street but not its victims, homeowners who over-borrowed from the value of their new or existing homes after being assured by their bank-financed lenders that housing prices always went up.  Borrower beware was the lesson they learned the hard way when housing prices plummeted.

Beware Wall Street Unregulated was the lesson that we as a country relearned one more time.

But we have more special interest groups than Wall Street to be wary of.  Wall Street is prominent because of the havoc that it caused and because of its outsized political contributions to forestall regulation.  At heart, what bankers want is the freedom to exploit other bubbles and other marks without government interference.  They don’t need a government commitment to bail them out because they expect to enrich themselves and their banks, not fail, or at least enrich themselves before their banks fail.

By contrast, another special interest group, centered metaphorically in the Pentagon, could not thrive without a government commitment, in this case a commitment to perpetual war budgets.  War budgets tend to get cut when we have no wars to fight, but since 9/11 we’ve been engaged in a perpetual war against terrorists that is the longest war in our history and second only to World War II in cost.

In his farewell address, President Eisenhower named this special interest group the military-industrial-congressional complex (MICC), although he judiciously deleted the “congressional” portion in the public version of the speech.  MICC consists of a large standing military represented by the top generals and admirals in the Pentagon, a huge defense industry built to support the Cold War and a widespread bipartisan congressional patronage network.

After the Soviet Union stood down the Cold War at the end of 1988 and then liquidated itself at the end of 1991, leaving the US as the world’s lone superpower, we might have expected a significant reduction in the defense budget as a peace dividend.  The defense industry, however, had other plans, and competing in the market for non-defense businesses in the free market wasn’t one of them.  As one CEO conceded, “sword makers don’t make good and affordable plowshares.”  Ford switched from Ford cars to producing Jeeps and one B-24 Liberator every hour during World War II – and then back to cars after the war – but that was then and this is now.

What the sword makers proved particularly adept at are what a seminal 1990 paper by veteran Pentagon analyst Franklin “Chuck” Spinney called defense power games.  These games, which are “played” with the other MICC members (the Pentagon and Congress) much as adults play games with their young children, involve two moves by the sword maker, front loading and political engineering.  Spinney explains:

Front loading is the practice of planting [i.e., inducing the Pentagon or Congress to allocate] seed money for new programs while downplaying their future obligations.  This game, which is a clever form of the old-fashioned "bait-and-switch," makes it easier to sell high-cost programs to skeptics in the Pentagon and Congress.  Political engineering is the strategy of spreading dollars, jobs, and profits to as many important congressional districts as possible.  By making voters dependent on government money flows, the political engineers put the squeeze on Congress to support the front-loaded program once its true costs become apparent.

The games create a bias for complexity, since the ultimate costs of complex systems are harder to forecast (making front loading easier to get away with) and involve more subcontracting to spread around the country.  But complex systems are also more expensive to build and to maintain, meaning that costs grow faster than budgets.  Who within the MICC takes the hit?

“The defense power games,” Spinney tells us, “are stratagems for … transferring money from the taxpayer to a central bureaucracy that subsequently disburses the money to a socialistic industry, even if the transfer sacrifices the capabilities of our military forces [emphasis mine].  That is what slashing the operations budget [which supports the military] to save the investment budget [which supports the defense industry] is all about.”

In the Pentagon, defense power games have never been called off.  As a consequence, we have the highest military budgets since World War II but our all-volunteer forces are stretched to fight the fights that the President says are necessary.  Something is wrong here, and I’m not talking about the budget deficit.

Until that wrong is righted, let’s make sure that the Pentagon ranks high among the objects of our occupation.

Changing Congress

To get into the subject of this, my first blog post – changing Congress -- let me run through a few assumptions without stopping here to explain them or defend them.  As expounded in Federalist Article #39, written by James Madison in 1788 as he argued for the adoption of the Constitution, the United States of America is a “government which derives all of its powers directly or indirectly from the great body of the people,” making it (by design) a democracy, and is “administered by persons holding their offices during pleasure, for a limited period, or during good behavior,” making it (by design) a democratic republic.  Members of Congress and the President are administrators elected by the people for a limited period.

But Madison also recognized in Federalist #10 that “men of factious tempers, of local prejudices, or of sinister designs, may, by intrigue, by corruption, or by other means, first obtain the suffrages, and then betray the interests, of the people.”  In 2007 Martin Gilens of Princeton concluded from an extensive study that “whether or not elected officials and other decision makers ‘care’ about middle-class Americans, influence over actual policy outcomes appears to be reserved overwhelmingly for those at the top of the income distribution.”  If government of, by and for the great body of the people is (by definition) a democracy, government of, by and for those at the top of the income distribution is a plutocracy.

The US today is a plutocratic republic.  Members of Congress are addicted to nonstop campaign fundraising, and almost all of the funds are raised from those at the top of the income distribution.  As Ken Silverstein pointed out several years ago in Harper’s, “the most lavish benefit of winning a congressional campaign is, ironically enough, the right to keep on campaigning – and therefore to keep raising and spending donor money.”  Although Congress is not the sole cause of our drift from democracy to plutocracy, I agree with Lawrence Lessig and Joe Trippi that we should strike at the root of the problem and fix Congress first.

Fixing Congress means electing members who have “an immediate dependence on, and an intimate sympathy with, the [great body of the] people” (Madison again) rather than just those at the top of the income distribution.  The hard way to get there is to persuade incumbent members of Congress to cure themselves of their addiction.  Lessig believes that we have to go for a Constitutional amendment, which has to be initiated by a two-thirds vote of both the House and the Senate or by the approval of two-thirds of the States for a Constitutional convention.  Approval of an amendment in either case requires the approval of three-fourths of the States.  Tough sledding, especially for a Constitutional convention, which has never been tried.

I like a third approach – putting up candidates who are committed never to accept donations over a certain amount, like 100 dollars per contributor per year.  This is the scheme proposed by the Fair Elections Now Act, a bill now before Congress to provide public financing for Congressional campaigns.  Getting Congress to pass the bill is also tough sledding, although (perhaps) not as tough as a Constitutional amendment.  A nice feature of FENA is forbidding candidates who sign on to it from using any money in the campaign – including personal or family wealth – that is not raised by personal contributions of 100 dollars or less or by matching contributions under the Act.

Imagining a Congress controlled by members beyond the reach of the plutocrats makes sugar plum fairies dance in my head.  But what really energizes them (the fairies) is another thought: what if the 99 percenters became regular voters?  What if they came to believe that the surest route to economic freedom is through exercising the political freedom that they already have to vote for candidates who don’t accept large donations?

As  I indicated in my (also first) tweet today, if only 99 percenters became regular voters in elections and primaries.  They could change Congress, 50 States & the World.